HI Charlie, apologies for a late post on this - its been an ongoing problem that has not really be solved (no time and no urgency).
I have both now and would like to look into it further and hopefully resolve it.
I am wanting to clarify the fixes that have been suggested by yourself and mmccarn.
I warm to his solution (mmccarn) if in fact it is able to resolve the problem.
Would that resolve the issue as he has suggested?
To again clarify the problem- our local SME server (7.5 Server/gateway mode) hosts a clients website but not the emails. MX records are set-up to point to there server, A records are pointed to our SME server. All internet emails and web traffic route as expected, except for our local email traffic.
I beleive this is a DNS issue. Our local SME acts our DNS and routes email traffic back to our server due to the web domain being hosted on the server, and hence no email delivery.
Also I'm going to post this again as suggested.

Regards John (ber)